Pricing Strategies: How to Set a Price Point That Maximizes Profit

In this video, I'm going to teach you how to price your product or service to help your business grow. Set the price too high and you can scare away buyers. Set the price too low and you may put your business in jeopardy. What's up? It's Jamal. And welcome back to the channel. We're going to be taking a look at various pricing strategies successful companies use to maximize the bottom line. And one of our HubSpot experts is going to introduce you to a new pricing strategy that has only become possible with advances in AI technology. Smart stuff. It could literally change everything we know about pricing, so keep an eye out for that. Pricing strategies vary by market, buyers, product or service. But one step every marketer must take before determining their price point is evaluating the competition. Competition based pricing is done by determining the market rate for your product or service and setting your price at or below the market rate. The lower your price is compared to the market rate, the more sales you'll be able to make. I think we can all agree we like sales, you know what I'm saying? Especially if you're entering a highly competitive market. So how low can you go? Well, that's a question that was asked by Ludacris many times and that actually depends on your costs. That's why the next step in any pricing process is to determine your cost for goods sold, or cogs. Cogs. This should include the price of materials and manufacturing, storage and shipping and other overhead like labor. Basically any variable costs on your balance sheet. Make sure to become friends with your finance and account team. Once you know your cogs, you're ready to determine a variable price for your product. To take the price you think you should charge based on the competition and subtract the cost of goods sold to determine your gross margin. Now, you can multiply that by the number of projected units sold. This will give you the final number of gross revenue and gross margin at a given price point. And cogs. If that gross margin is enough to cover fixed costs like salaries and facilities and still leave enough for a respectable profit margin, then you set a good price. If the margin is too low, see what happens when you raise your price. Remember that any change to your price could also affect projected numbers of units sold. Keep testing different prices until you find one that works. I'm sure some people are thinking, oh, just set the price to whatever I want. Yeah, let me know how that goes. Seriously, let me know how that goes. I'm curious now to make all this easy for you. HubSpot has a free sales pricing calculator that you can download from a link in the description below. The calculator contains several additional pricing strategies that you can try. Seriously, it's wild just how much value we give away for free. But knowing your competitive pricing and cogs is required no matter how many additional strategies you use. So in the most common alternate pricing strategies for physical goods are Cost plus, Premium, high, low, and skimming. Let's start with Cost plus, which is commonly used in retail and E commerce. With Cost plus pricing, you determine a fixed dollar or percentage markup that apply that to the wholesale price of the goods you're selling. So let's imagine that you sell books online. Who's buying books online? That's what I want to know. The average markup for online retail is about 42%. So say a book costs $10 wholesale and you want to charge a 40% markup. Your retail price would be $14. So if you sell 100 books a month, your gross revenue would be $1400 and your gross margin would be $400. Remember that the average margin can vary greatly between industries as well as what part of the industry you're in. Food processing has an average margin of 27%, while food wholesalers mark up the food they buy from from the processors by 15% and grocery stores market what they pay the processors by an average of 26%. The point is, cost plus pricing still factors the competition, but at an industry level. So if you're pricing a lot of goods, you can save time and still determine a good price by using Cost Plus. Of course, there are a lot of consumer products that sell for margins way above the industry average. These products are priced using a premium pricing strategy where the consumer demand for a product is higher than the cost of production. Name brand fashion, fancy watches, luxury automobiles, time with me all use premium pricing strategies. In fact, and this is kind of crazy to think about, a lot of the value customers put on some of these products comes from the premium pricing, and higher prices can actually create more demand. Just remember that pursuing a premium pricing strategy comes with some significant costs. Every business needs to market itself, but premium brands spend billions on advertising every year. Also, premium brands stay premium by being status symbols, which means you can't sell too many of a product or else the special status is lost. There are some products that start off as premium, then lose their luster as time goes on. Kind of like time with me. This commonly occurs with tech products where new and improved models are constantly coming to market, but it can be true of any product where novelty creates high demand in the beginning that will lessen over time when prices reduce over time. That strategy is called skimming or high low. Apple uses skimming pricing strategy for its iPhones, where the newest model is sold for a premium price, while older models continue to be available at a reduced cost to customers. High low pricing is also found at a lot of clothing retailers, where prices are dropped to clear out the shelves of last season's items to make room for new weather appropriate merchandise. Digital media like video games and movies also use similar strategies where new releases are priced high and and then reduced once the initial buzz wears off. But speaking of digital products, there's another significant difference when considering how to set a price. Because unlike physical products with their pesky material manufacturing and distribution costs, the typical digital product has extremely low scaling costs compared to physical goods. A video game costs roughly the same amount to produce, whether it has 100 players or 100 million. This gives businesses a lot more flexibility in pricing because every unit sold of a digital product reduces the per unit cost. That's why two of the most popular pricing strategies for digital products, freemium and penetration, practically give away the product. If you're familiar with HubSpot's suite of sales and marketing services, then you've encountered our freemium pricing model. Freemium is where users can access a basic version of the product at no cost. And the truth is for most users, the free version is all they need. But as their business grows, some users may want to upgrade to various features that are only available with the paid tiers. For me, and pricing works best if the higher tiers are subscription based instead of one time licenses fees. But you can use the freemium tab on our sales pricing calculator to know for sure. Now, some digital business models only work if they can capture a large market share. To achieve this, they use a penetration pricing strategy. Streaming services like Netflix use penetration pricing to gain hundreds of millions of subscribers worldwide. The same goes for TV and Internet providers who offer steep discounts to get homes wired to their service, knowing that the effort involved in switching services is more than most customers want to deal with. So they'll make up for the low cost over years of monthly billing. My grandma's been paying for AOL ever since Bill Clinton was in office, to be honest with you. So we've discussed the most common pricing strategies found today. Hooray. But as promised, there is a new technique that is becoming popular as AI algorithms become more and more powerful. It's called dynamic pricing. And to explain it, here's HubSpot senior marketing manager AJ Beltas Dynamic pricing is.

A system where the price of a good or service changes in almost real time based on market conditions. In first became commonly used by airlines and hotels in the 1990s, but we all became acutely aware of it when ridesharing apps like Uber introduced surge pricing, which rapidly increases the cost of a ride during times of high demand, like, say, when a rainstorm hits during rush hour. Dynamic pricing algorithms already change the price of products on Amazon 250 million times every single day, and that number keeps growing as more professional sellers and third party vendors utilize these tools. So it's hard not to imagine a future where everything you sell comes with a customized price point for each buyer, depending on the circumstances at the moment of purchase.

Thanks AJ One thing about Uber and other unicorn startups, many use a mixture of dynamic and penetration pricing, so the price adjusts to demand but is capped while trying to achieve scale. In fact, you probably noticed that most of the pricing strategies we've discussed in the video consider a mix of factors to determine the best amount to charge. Remember that when you're getting ready to set your price. And don't forget to download the free pricing strategy calculator from the description below before the video ends. Now, if you'll excuse me, I got some more premium goods to go pedal. You know what I'm saying? Look out for my Etsy shop. Until then. I'll see you next time.

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